Ballmer hopes tablet will speed recovery

By Richard Waters in San Francisco

Microsoft is preparing to show off its all-important entry in the tablet computing race. And for Steve Ballmer, the company’s increasingly embattled chief executive, it is set to be a personal test of his ability to push the world’s biggest software company faster into big new technology markets where it has fallen badly behind.

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At events in California and Taiwan this week, Microsoft executives are expected to give an early glimpse of the first version of its Windows PC operating system to have been designed from the ground up with devices well beyond the PC – including tablets – in mind.

For Microsoft’s critics, the writing has been on the wall of late.

Already overtaken last year by Apple, the company’s stock market value also briefly fell below that of IBM last week. That underlined comments at a recent IBM analyst meeting by Sam Palmisano, the company’s chief executive, who took clear relish in the tech trends that have been weakening Microsoft’s power: “I said the PC era was over. Well, nobody argues with that anymore, just look at the market and the economics associated with it. It’s completely commoditised.”

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Adding to Mr Ballmer’s discomfort, David Einhorn, a hedge fund manager and large Microsoft shareholder, last week called for new leadership at the software company. Ironically, even Mr Einhorn paid credit to what he called Microsoft’s “achievements and prospects” after 11 years with Mr Ballmer at the helm, and complained of the big discount on the stock.

Despite steady double-digit growth in earnings since the tech bust at the start of the last decade, Microsoft’s share price has been stuck in a rut. The stock is trading at only nine times expected earnings for its next fiscal year starting in June – a substantial discount to the broader market, despite the company’s superior earnings growth.

It is the fear that Microsoft has missed the boat on the biggest recent trend in personal computing that accounts for much of the unease.

Already more than three years late with its answer to the iPhone, Mr Ballmer committed the extra mistake of failing to see that the touchscreen revolution would move quickly to larger devices – posing a more direct challenge to Microsoft’s PC base. “They should have seen the writing on the wall when the iPhone came out,” said Al Hilwa, an analyst at IDC, a technology research firm.

According to an estimate by Goldman Sachs, 35 per cent of tablet sales are likely to come at the expense of PCs, wiping 21m units from the PC market, which last year hit about 350m. At the AllthingsD conference in California and the Computex industry trade show in Taiwan this week, Microsoft will step up the efforts to turn the tide of sentiment in its favour. Having already this year demonstrated an early version of the next Windows running on the low-power ARM processors on which tablets are based, the company is expected to show off its all-important touchscreen user interface.

According to Walter Pritchard, software analyst at Citibank, being able to produce the “eye-candy” of an attractive user interface will be key to Microsoft’s ability to grab attention for its tablet efforts.

The generally positive reaction to the latest iteration of Windows for smartphones has helped to raise hopes, despite the slump in sales of those devices. “In the last year and a half they have woken up from a slumber and got the mobile device thing,” said Mr Hilwa. Even if its software efforts start to win converts, though, it is unclear whether Microsoft can act quickly enough to become a force in the tablet market.

Despite hopes on Wall Street that the company will push out the next Windows quickly, with a special tablet edition of the software possibly even on the market this year, the indications are that the company will continue to resist rushing into the market.

It has called a developer conference for September – an event at which it usually releases the first, early versions of its new operating systems, with a full public test version not following for several months.

That could push a Windows tablet launch into the second half of next year. Most tech industry analysts argue that the tablet market is still in its very early stages, and that, with Google’s Android making a slow start on the devices, there is still plenty of room for more competition. Mr Ballmer, in need of a hit product, will hope they are right.